Checks are negotiable instruments regulated in the United States under the Uniform Commercial Code (U.C.C.) Articles 3 and 4. Traditionally, checks (or drafts, or demand drafts as they are known within credit unions) are paper based negotiable instruments (written instructions to pay someone) created by the payor (or drawer) filling in a pre-printed form on paper check stock. Traditionally, the written instructions are provided by the payor via various inputs including handwriting, typing, or computerized printing of the required payment information which can include authorized instructions to pay someone (payee) some amount as of a certain date via funds which are to be drawn on a financial institution account (the drawee) where the payor holds funds under a Demand Deposit Account (DDA). The DDA account is generally known as a “checking account” but this type of payment can also include various types of financial accounts including but not limited to money market accounts, special accounts including stored value accounts and the like. The paper check can include other information beyond a written order to pay someone (the payee), such as memo line notations that are useful to both the payor and the payee or both. Examples of additional payment data included on checks are data that identifies the payor's general ledger or accounting codes for expense tracking which is useful to the payor's accounts payable accounting process as well as customer account numbers, invoice numbers, billing numbers and other remittance data that can be requested or required by the payee as it proves useful under the accounts receivable accounting process of the payee. The check payment is then sent out using the mail, overnight delivery, hand delivery, or the like, but in the end the paper check is physically delivered directly to the payee to satisfy a debt owed by the payor to the payee, or alternatively to provide a gift or donation to the payee.
Upon receipt, the payee deposits the paper check into their financial institution (e.g. a bank, credit union, savings and loan, brokerage money market account, etc., herein referred to simply as a “bank”) for posting to update the balance of their account at the payee's bank. The depositing bank bundles together all of the paper checks they have received and sends them to the banks' “Item Processing” department for processing (i.e., sorting, grouping and totaling) by high speed machinery. The purpose of this processing was to generate the necessary accounting entries needed to debit and credit the appropriate checking accounts and clear the payment. If the deposited check originated outside of the bank (i.e. the deposited check was drawn on another bank), the paper check would have to be forwarded for presentment to the originating (or paying) bank for payment.
Traditionally, paper checks are moved, a process known as forwarding, from the Bank of First Deposit (BOFD) to one or more clearinghouses—either another regional clearinghouse which was closer to the clearing bank (often times a Federal Reserve Bank in the issuing banks geographic area) or directly to the paying or clearing bank. It is the clearing banks responsibility to validate the check, verify the account exists and has sufficient funds and then pay the BOFD so it may credit the account of the depositing payee. The actual funds movement between banks is typically accomplished by a “net settlement” process using accounts at the clearinghouse which managed the process.
This dependence on the movement of paper (for security, authenticity and processing/payment) created a multi-day processing period between the date of deposit and the date of payment and finally the date of credit to the payee's account. This movement of paper checks was a weakness in the United States financial system as checks have been the preferred method for making payments between individuals, businesses, and the government. Despite the logistical requirements of moving paper, checks are preferred by payors as they are a “push” type of payment (versus an Automated Clearing House or ACH debit which “pulls” funds from their account) which among other advantages allows the payor to control the issuing of the check and thus the timing of the funds being removed from their account. Further, the movement of these paper checks frequently utilized the airline network to quickly move paper from one part of the country to another. Thus, when 9/11 struck and the airline fleets were grounded, the entire check clearing and payment system was shut down. This caused paychecks to not be delivered and people were left without funds to pay for necessities. The aftermath of this transportation delay created political pressure on the federal government to eliminate the dependency on paper check clearing within the banking system.
Prior to the Check 21 Act, a bank that presented a check for payment was required to present the original paper check unless the clearing bank had agreed to accept alternative presentment from the depositing bank in some other form, such as electronic image exchange. §3-501(b)(2) and §4-110 of the Uniform Commercial Code (U.C.C.) specifically authorize banks and other persons to agree to alternative means of presentment, such as electronic image presentment. However, to truncate checks early in the collection process and engage in broad-based electronic presentment, a collecting bank would need electronic presentment agreements with each bank to which it presents checks for collection. This limitation proved impracticable because of both the large number of banks and the unwillingness of some paying banks to receive electronic presentment. As a result of the difficulty in obtaining the agreements necessary to present checks electronically in all cases, prior to the Check 21 Act, banks had not been able to take full advantage of the efficiencies and potential cost savings of handling checks electronically.
The Check Clearing for the 21st Century Act (Check 21) became effective on Oct. 28, 2004. Check 21 was designed to foster innovation in the payments system and to enhance efficiency by reducing some of the legal impediments to check truncation (i.e., eliminating a paper check by converting it into a digital image and destroying the original paper item). The law facilitates check truncation by creating a new negotiable instrument called a substitute check, which permits banks to truncate original paper checks, to process check information electronically via exchange of check image files, and to deliver substitute checks to banks that want to continue receiving paper checks. According to the Electronic Check Clearinghouse Organization (ECCHO), the leading banking industry trade association for electronic check presentment, the concept of a substitute check is defined as the following—“The idea was to enable a bank to substitute a machine-readable copy of a check (a “substitute check”) for the original check for forward collection or return.” —as documented on their website defining industry terms and concepts at www.eccho.org/check21_resource.php herein incorporated by reference in-full as of this filing.
A substitute check is created from a check image described by the X.9.37 ‘ANSI’ draft standard or now the X9.187 standard and their subsequent updated versions (including the Federal Reserve and ECCHO rules regarding electronic check image exchange which supersede, enhance or augment these standards with additional information, requirements or definitions), all of which are herein incorporated by reference in-full. This check image is a digital bitmap in Tagged Image File Format (TIFF) format created by electronically scanning and imaging the front and back of the original paper check. The substitute check (also known as an Image Replacement Document (IRD)), may be created by printing the front and back images along with some additional information on an 8.5×11 inch sheet of paper and cut to fit standard paper check dimensions for processing. Under the Check 21 law, this substitute check or IRD is treated as the legal equivalent of the original check and includes all the information contained on the original check. When printed, the images and data must conform to the X9.140 standard and subsequent updated versions, which are herein incorporated by reference in-full. The law does not require banks to accept checks in electronic form nor does it require banks to use the new authority granted by the Act to create substitute checks. Due to the general uniformity and commonality provided by industry agreed to rules and technology standards surrounding Check 21 based image exchange procedures today, almost all paper check items are cleared and settled electronically as images, not as the original paper checks drawn by the payors.
Referring to FIG. 1, a substitute check (or IRD) 10 is a reproduction of an original check that contains an image of the front and back of the original check and is suitable for automated processing in the same manner as the original check. To clear a check for consideration of payment, the depositing bank transfers, presents, or returns the substitute check 10 (or another paper or electronic representation of a substitute check, such as an Image Cash Letter, or ICL, file) and warrants that (1) the substitute check 10 contains an accurate image of the front and back of the original check and a legend stating that it is the legal equivalent of the original check, and (2) no depositary bank, drawee, drawer, or endorser will be asked to pay a check that it already has paid. The substitute check 10 for which a bank has made these warranties is the legal equivalent of the original check for all purposes and all persons.
Although Check 21 has facilitated the inter-bank exchange of electronic check images, it has not been fully utilized by all the parties in the check payment system. More specifically, both payors and payees have specifically been left out from leveraging or utilizing the cost efficiencies, ease of electronic creation, timeliness and other benefits provided by the Check 21 legislation and subsequent X9 based technology standards to implement their payment transfer requests (i.e. to make their own payment drafts or checks electronically without an original paper item). Nor have payors and payees been enabled by either the banks or the existing alternative payment system providers (PayPal, CheckFree—now Fiserv, credit card processors, NACHA/ACH, and the like, including the other new electronic funds transfer systems which utilize these and other funds transfer systems) to generate or create paperless Check 21 style items (i.e. payor originated or created standards based paperless check items which can be processed by the payee electronically as a true UCC check item). This failure in creativity by both banks and payment systems providers and vendors has prevented check payments from returning to prominence among the various types of payments. Thus, this lack of payor and payee enablement allows ACH, debit, credit and the like style payments to continue to grow as a percentage of volume of total payments as measured by the periodic Federal Reserve Payments studies (all editions of these studies are incorporated herein by reference).
According to general market understanding as of 2006, the failure to provide payor and payee paperless Check 21 item processing was primarily due to perceptions regarding a variety of security weaknesses and or missing definitional elements within the existing legal or procedural rules (including regulatory gaps) that were viewed to be either unsolvable or heretofore to be blocked by perceived systems and regulatory complexity. Additionally, complex and rapidly changing business models or conditions, commonly found in technology enterprises but missing within banks have created economic, political, or technology creativity barriers which would need to be overcome before a wider adoption of Check 21 imaging concepts such as payor origination can be implemented across the payments industry. First, in terms of general Check 21 industry implementation problems, frequently both the actual paper check and the Check 21 image may be cleared by the bank creating a double debit situation. Note that while the actual number of occurrences of these double debits has been reduced as banks improve their internal Check 21 business methods and systems, these same well known debit issues are generally unavoidable for any bank first implementing a Check 21 style image clearing process for either the forward or return clearing cycles. Second, as recognized by check security expert Frank Abignale, a variety of security issues are of grave concern to banks given the fact that after imaging, a paper check looses the entire set of existing paper security features which have been developed over the last 30 to 40 years. These image security holes show up primarily in the banking industry when they contemplate the concept of having a customer present an image to a bank to be settled as a UCC check payment. Consider for example, the case where a customer shows up to a bank teller with what looks like a Check 21 image in IRD form. As currently viewed by the industry, anyone with a modest degree of skill in digital graphics editing can create a valid, Check 21 like image using PhotoShop or other graphics software programs by using stolen Demand Deposit Account (DDA) data to create a fraudulent check. Also, given the lack of security in paper IRDs, banks are reluctant to accept random IRDs for deposit, slowing down their acceptance as returned items.
Finally, under the existing Check 21 act, only banks are permitted to image paper checks to create Check 21 items (i.e. X9 style cash letter items). According to the ECCHO industry reference site definition: “A bank creating the substitute check and all subsequent banks that process the substitute check provide warranties and an indemnity to subsequent parties in the collection and return processes. The warranties are that: The substitute check meets the Act's legal equivalence requirements; and No party will be asked to make payment based on a check that it has already paid (no double debit). The indemnity relates to losses incurred due to the receipt of a substitute check instead of the original check. In the instance of a warranty breach, the indemnity includes damages proximately caused. In the absence of a warranty breach, the indemnity is for the amount of the substitute check plus interest.” Thus, banks have not utilized any type of customer agreement or contract to extend Check 21 style warranties and indemnities to end users (payors or payees) as they do not envision a way for customers to generate their own check images. So from the standard industry viewpoint, there are legal and regulatory barriers that must be overcome before Check 21 items would be viable consumer originated payment mechanisms. These problems must be overcome before the concepts of Check 21 can be applied to everyone—allowing more users to receive the benefits that are already being received by the banks. The benefits of payor based image origination and an all electronic check processing system include but are not limited to: faster delivery to payees via email and other electronic delivery methods, lower costs from efficiently processing payments and the reduced clearing time and reduced risk exposure from unknown payor items on out of town banks, as well as the enablement of entirely new business models and products that were previously impossible or not imaginable under a paper check system including the existing use of electronic check image exchange of paper checks. Recently, the check image exchange industry (ECCHO and the Federal Reserve) have begun to realize the conceptual benefits of an all electronic origination method to succeed the paper check/electronic image exchange process. In a November 2009 Policy Discussion paper titled “Digital Checks as Electronic Payment Orders”, herein incorporated by reference in-full, issued by the Chicago Federal Reserve office, they note that a new paperless check payment form, which they term as an Electronic Payment Order (EPO) would benefit the industry. It should be obvious to those skilled in the art that the banks have just now realized that the dependency on paper origination for checks as contemplated by the original Check 21 act is a weakness that must be addressed to enable the check to continue to be a preferred payment mechanism and therefore grow in processing volume in the future. Finally, if properly implemented, the concepts provided by the Check 21 act would enable everyone from consumers to businesses to governments to charities to create and effectively process, secure electronic payments in a manner similar to existing low cost electronic payment methods such as Electronic Check Automated Clearinghouse (ACH) items covered under the National Clearinghouse Association (NACHA) rules and other electronic payment clearing rules.
Referring to FIG. 2, conventionally under Check 21, substitute checks or IRDs are only utilized between banks, such as clearing banks, banks of first deposit, and the like. A flowchart 20 illustrates an exemplary embodiment of Check 21 under conventional operation. First, a payor drafts a paper check from their demand deposit account (DDA) bank (step 22). Next, the paper check is physically delivered, such as mailed, hand delivered, etc., to a payee (step 24). The payee manually deposits the paper check into their bank account (step 26). The bank where the payee deposits the check is referred to as a bank of first deposit (BOFD). Once in the BOFD, the paper check is sorted and converted into a substitute checking according to the regulations under Check 21. The BOFD can pay the payee cash, credit the payee's account, or the like (step 30) once the check has been deposited into the payee's account. Also, the BOFD initiates the clearing process with the substitute check through a traditional clearinghouse or an Electronic Payments Clearinghouse (EPCH) or the like (step 32). The clearing process moves the substitute check to a clearing bank, i.e. the bank with the DDA account of the payor, and the clearing bank validates the substitute check, verifies the account exists with sufficient funds, and finally pays the BOFD (step 34). Finally, the clearing bank can use the substitute check image with the payor's monthly statement in lieu of paper checks (step 36).
Of note, the Check 21 Act does not require any bank to use electronic check processing, receive electronic presentment, or create substitute checks based on check images. However, after the effective date of the Check 21 Act, any bank that requires an original check must accept a legally equivalent substitute check in satisfaction of that requirement. As a result, for the most part, banks would not be required to change their check processing equipment or practices because of the Check 21 Act, and there would be no need for a bank to sort original checks and substitute checks separately during the check collection process. Using the substitute check format, banks which choose to use image processing during their check collection and clearing process are allowed to do so while maintaining backwards compatibility with banks which do not have the ability to electronically process image files. For example, in the past a depositary bank in California that receives a check drawn on a bank in New York would transport the original paper check back to New York for payment. Now under Check 21, a substitute check image file can be sent to the New York bank without specific prior contractual agreement or consent by the New York bank to the California bank. Now, if needed, the New York bank (or its agent) can receive the image file and print it in IRD or substitute format and continue to process the re-created paper check using their traditional check clearing process. In summary, Check 21 allows banks that wish to image checks and exchange image files to do so while still allowing some banks to receive compatible paper checks based on Check 21 image files.
Electronic payments and images and the like contain raw data which constitutes the item itself, however there is another form of data called “metadata”. Metadata is data about data. An item of metadata may describe an individual datum, or content item, or a collection of data including multiple content items. Metadata is used to facilitate the understanding, use and management of data. The metadata required for effective data management varies with the type of data and context of use. The concept of “generating a bitmap from metadata” is foreign to banks, but common in the computer graphics industry. Thus, those skilled in the art of payments generally do not know how the computer graphics bitmap “rasterization” process works. However, as is known by those skilled in computer graphics, it is often easier and more convenient to generate bitmap images dynamically from metadata. Further, there is no nexus between metadata driven bitmap generation and the payment system, checks, or legal contracts, the UCC and the like. Also it is considered by the present invention, in order to make an electronic check image payment system acceptable to banks, additional security is required to protect banks from accepting fraudulent images (e.g., created by hackers using a graphics program). Given the size and degree of investment that banks have made in paper check imaging equipment, it can be seen by those of average skill that there has been no incentive for banks to pay for the designing and building of new software systems to enable end user created paperless Check 21 items. Additionally, there is little to no existing Public Key Infrastructure (PKI) systems at banks (other than Secure Sockets Layer (SSL) keys for website security) to facilitate end user digital signing of payor created Check 21 images stored inside paperless or electronic check files.
Thus, conventional mechanisms in the banking and payment industry include imaging of paper checks. Check 21 law only allows banks to truncate paper checks to create Check 21 items. Payee only methods such as Remotely Created Checks (RCC) enable payees to print checks on behalf of the payor to fulfill payment obligations but they either do not utilize Check 21 image type processes or they lack payor origination. The features of Remote Deposit Capture (RDC) are currently available to businesses who receive paper checks. RDC based systems allow the person or business, as a payee, to utilize computer hardware devices to scan and image paper checks and remotely deposit them into their bank; but traditionally these items may be truncated and cleared through an Automated Clearing House (ACH) agreement as POP or ARC ACH items, which are regulated under NACHA rules and or EFT laws not as UCC check items. Previous, earlier attempts at non-paper based check type systems either utilized non-UCC law and clearing mechanisms, or required physical hardware to create, store or generate the security keys required to uniquely identify both payors and payees as well as they all lacked a key feature—the use of industry standards, such as X9 check image standards, which are required to ensure the widespread usage and adoption across the banking industry. Thus, no conventional mechanism exists to allow UCC based electronic checks to flow through the entire check payment system without reduction to paper at some point or conversion into another payment type. Existing ACH “electronic check” or Online BillPay type payments shown in prior art do not solve these problems as these all disclose a paper check in one form or another in the process or are non-UCC items. Further, these ACH “electronic” checks do not comply with ANSI or X9 standards.